The Evolution of Affiliate Marketing

By Jeff G. Molander

Oct 20, 2005, 09:51

TARGET MARKETING MAGAZINE: OCTOBER, 2005

Dominated by search and affiliate programs, online marketing is poised for dramatic change. Marketers are investing more heavily in performance-based marketing and are in search of an integrated approach that allows for a more accurate means to measure success. Today, affiliate marketing has become one of many online strategiesÑalong with search, portal deals and the like. Discussions with change-oriented industry veterans offer an honest perspective and reveal significant tactical shifts of how and where change will occur and how you can best capitalize on the forces that are already shaping the future.

These days many advertisers seem to rush through, or even skip this process completely. Most likely this is a direct result of the rushed timelines for media campaigns and lack of proper resources. The opportunity cost of neglecting this process can be high when the final product does not perform to full potential. In this article I will explore several key elements of the creative brief process that we have refined here at NETexponent. Below are several questions used in actual creative briefs and examples of appropriate answers. The names and answers have been changed to protect the innocent.

Industry Pulse Check

How big is affiliate marketing? Forrester Research rushed to answer the question in 1999 claiming that $10.5 billion in e-commerce sales would pump through affiliates by 2001. Since then, weÕve not heard a peep regarding size, as affiliate marketing has yet to be clearly defined. The entrance of dozens of privately-held cost-per-acquisition (CPA) networks further complicates understanding.

Has the business itself solidified into a full-fledged "industry"? We estimate that roughly $175 million dollars in 2004 fee revenue was captured by the public players in the domestic market with an additional $124 million booked by private ventures. Internet advertising solutions provider ValueClick estimates the global affiliate marketing sector as a half-billion-dollar market. (EDITOR'S NOTE: This article published prior to Linkshare Corporation's acquisition by Rakuten)

As reflected by various studies by the likes of Forrester Research and Marketing Sherpa, affiliate marketing is alive and well, with marketers rating it the most effective of all online strategies. Yet marketers, ranging from retailers to service-based companies, admit that the sentiment is mostly a hunch based on the strategyÕs pay-for-performance premise--one that is increasingly coming under scrutiny by marketers who are concerned with potential pitfalls ranging from fraudulent commissions to duplication of marketing efforts in search engines.

The Affiliate and Search Marketing Conundrum

Broadly speaking, affiliate marketing has evolved into a practice wherein marketers rely on affiliates for none, some or all of their paid and "natural" search marketing. This typically can result in an agreeable or stressed relationship between affiliates and marketers due to dueling competitive interests. In essence, affiliates have always known what works best. Brand names and trademarks stand front-and-center. Affiliates were first to master and leverage search on behalf of marketers, yet marketers are beginning to take search back.

Patrice Colancecco, long-time affiliate manager for catalogers, direct marketing and financial services companies, including Eastwood Company, suggests affiliate marketing has become so search-centric that marketers who maintain a strong search program may not need affiliates. As consumers "surf" less randomly, she says, affiliates use search to net and/or intercept prospective customers, shuttling them on to marketers. Why? She suggests itÕs easy to get involved in search.

"Some affiliates even do their own advertising," she says. "So why would you have them do this when you could do it yourself? Either you consider this suitable outsourcing or you don't know how to do it."

Colancecco believes marketers latched on to affiliate marketing in an eraÑunlike todayÑplagued by many expensive online advertising options. Today, things are less complex and more affordable.

Jeff Nienaber of Celebrate Express, a marketer of celebration products for children, agrees, but suggests that allowing affiliates to leverage search can create hidden costs.

"We always suspected that our affiliates were costing us more than originally expected," says Nienaber. "Conducting an audit revealed serious cost in-efficiencies that, once corrected, drove affiliate-related costs down, for the first time, without harming sales."

Colancecco suggests affiliates "have a knowledge and expertise that is only obtained by being out there every day, tweaking and testing and analyzing. If you really want to have a great search program, those are the people you should be headhunting. They are doing the job that you should be doing yourself."

Know Thy Affiliates

Increasingly, affiliate managers are wringing their hands over a variety of problems that revolve around transparencyÑknowing who oneÕs affiliates actually are. In a world fraught with trickery ranging from downloaded adware on un-suspecting consumerÕs computers to affiliates eagerly loading browsers with cookies without legitimate referrals being made (also known as "cookie stuffing"), affiliate managers are always on the lookout.

According to leading adware expert Ben Edelman, marketers make a mistake when failing to supervise or investigate their affiliates' use of adware. As stated by Colancecco, when affiliates themselves buy ads they often use pop-ups via adware. When consumers receive unwanted, obtrusive and sometimes destructive ads they become rightly angry at the marketer who funds adware infections on their computers.

"Plausible deniability isn't good enough," says Edelman. "Marketers should focus on the risks to their brands when involved with these shady practices."

Edelman warns managers not to look the other way when it comes to adware. Working with affiliates using adware may create the illusion of booming sales and/or leads that, when eventually removed from the equation, will be difficult to replace with legitimate sales and/or leads.

Similarly, Peter Figueredo, CEO of online performance marketing agency NETexponent, warns that so-called "CPA networks" can be a breeding ground for fraudulent orders or bogus leads. A haven for anonymity, these affiliate network spin-offs operate similar to better-known affiliate networks, yet typically consist of overly aggressive e-mail, adware and/or search marketing affiliates.

"Networks and agencies that add value are the only ones that will survive long term," says Figueredo whose company manages affiliate programs. "Networks that add value based on optimization technology, strong publisher relationships, quality marketers and transparent operations, right now may not be raking in the cash and handing out Porsche Boxters, but in the end marketers will recognize fly-by-night networks for what they are."

Time for New Rules

Like many direct marketers, Lisa Papageras invested in affiliate marketing strictly as a means to acquire new customers on the cheap for the properties she manages, the Hudson, OH-based catalogs Wind and Weather, Art & Artifact, Signals and What on Earth. At the beginning, Papageras found affiliates to be extremely time-consuming and difficult to manage because they need to be monitored and nurtured.

"Once we discovered that our goal of new customer acquisition wasnÕt being met under our desired terms, we attempted to adjust the agreements under which our partnerships worked," Papageras explains. "Unfortunately, our proposed solutions fell upon deaf ears with our affiliate network and we completely withdrew from affiliate marketing."

Despite shuttering the program, to her surprise online salesÑagainst total salesÑincreased by 6 percent versus the same time frame the year prior. Sales across all channels increased by 7 percent in that time frame as wellÑall without an affiliate program in place.

Papageras wants terms and conditions that restrict affiliates in search. Although still a fan of affiliate marketing, she explains, "I would like to continue with a re-defined affiliate program, one that could be conducted under our new rules. Unless our terms can be met in this marketing medium, it is my responsibility to look for other opportunities to find new prospects and customers."

The Future: Integrated Performance Marketing

Affiliate marketing is increasingly being viewed as a cog in a multi-faceted performance marketing wheel. While marketers first placed affiliate marketing at the center of online marketing, today most view it as a good starting point to test for potential. If affiliation works, more serious relationships involving other performance compensation structures may be in order, such as cost-per-click (CPC).

In fact, performance based "hybrid" arrangements are becoming popular, and might include any number of elements rather than just pure "commission" or a "bounty" on a new customer. For example, in cases where affiliates send more existing customers than new customers, the spend becomes retention oriented and, therefore, requires a new financial arrangement. Hybrid payment arrangements provide this flexibility. Most popular examples include paying for "featured merchant" status during a holiday or season. These involve a commission plus a "slotting" feeÑto be placed into the special location.

As marketersÕ needs diversify, companies serving them diversify their offerings. Innovative solutions that assist marketers in this process stand to reap the rewards. While affiliate solutions providers scramble to partner with Web analytics tools, companies such as marketplace management company ChannelAdvisor and online retail merchandising solution provider Mercent, are entering the fray. These companies promise to help marketers bring product data feeds together so as to streamline multi-channel performance marketing partnerships and connect the dots between all marketing initiatives-- ranging from eBay and Yahoo stores to affiliate marketing programs.

Dollar for dollar, does your affiliate marketing program truly generate more cost-effective sales than your comparison shopping partners or e-mail programs? Do your print mailings influence affiliate sales? To what degree and how might this knowledge be used to work more cost-consciously with affiliates? These solutions aim to provide such answers in real time and theyÕre catching on.

Similarly, Chris Sanderson, AffiliateCluetrain blogger and general manager of AMWSO, a provider of affiliate marketing and Web services, reports that forward-thinking affiliate managers are using tools such as RSS (real simple syndication) to solve "data freshness" problems.

"Marketers often receive calls from customers due to shipping and item price differences that occur when affiliates rely on manual data updates rather than automated ones," according to Sanderson. "Presenting affiliates with data that needs manual updatesÑbe it prices, shipping policies or couponsÑis just asking for trouble."

RSS offers a means to streamline the distribution process. In improving the accuracy of offers and product descriptors (price, color, images, etc.), affiliates send more visitors that convert to sales.

Increasingly, behind the scenes, marketers are demanding more out of their affiliate programs. TheyÕre pushing the limits of their technology partners and program managers. In the end, growing pains will be overcome and more efficient marketing strategies will emerge. Performance-focused marketing isnÕt going away any time soon.

Jeff Molander is CEO of Molander & Associates Inc. His analysis and recommendations serve to bring online performance marketing programs toward more integrated strategies that are congruent with multi-channel customer acquisition and retention objectives. He can be reached at jeff - at - molanderassoc.com